Homeowners with ultra-low mortgage rates ‘saved’ $600 billion, offsetting Fed rate hikes: Swiss Re Institute

Mortgage market conditions over the past two years have tempered the effectiveness of monetary policy tightening by saving $600 billion for homeowners, accounting for about 2% of personal consumption spending since 2022, according to a report by two Swiss Re Institute senior economists.

“A dollar not spent on mortgage payments is a dollar free to spend elsewhere. This helps explain why the recent policy tightening did not initially appear to slow the economy,” Mahir Rasheed and James Finucane wrote in the report, published on Monday.

In 2020 and 2021, during the COVID-19 pandemic, the Federal ReserveThe loosening monetary policy led to homeowners locking in their mortgages for fifteen to thirty years at historically low interest rates.

But when monetary policy shifted in the spring of 2022 due to persistent inflation, market mortgage rates exceeded the average rate borrowers paid on existing mortgages by as much as 3.2 percentage points, the economists said.

To illustrate, the Federal Open Market Committee raised its policy rate by 425 basis points in 2022 and by 100 basis points in 2023, keeping rates at current levels of 5.25% to 5.5% since July 2023.

As a result, the market interest rate for mortgages was almost 7% at the end of June 2024, compared to an average existing mortgage interest rate of around 4%. Overall, 95% of U.S. home loans are 15- or 30-year fixed-rate mortgages, and more than half are still paying less than 4%.

“We examined this gap for the two years through the second quarter of 2024 and estimate that homeowners with fixed-rate mortgages have accumulated more than $600 billion in ‘savings’ on their mortgages during the post-pandemic expansion, amounting to almost 2% of personal consumption expenditure. ,” the economists wrote.

According to the analysis, the mortgage lock-in effect has supported strong consumer demand as rates rose and will counter the effectiveness of the Fed’s rate cuts, which are expected to begin in September. That could require officials to cut rates more aggressively than baseline estimates, the economists said.

“Most mortgage lenders will continue to make the same mortgage interest payments, with limited motivation to refinance or pay off early. This gives us insight that there is limited upside to GDP growth over the next 12 months,” Rasheed and Finucane wrote.